Dart Energy Acquires Composite Energy Stake

2010-09-03 11:00:34

Dart Energy Limited (Dart) (DTE) has advanced its plans to create a global coal bed methane (CBM) company by acquiring a strategic stake in Composite Energy Limited (Composite), a leading European CBM operator. Dart will initially acquire a 10 percent stake in Composite by subscription of US$7 million, and has an option to increase its stake to 20 percent prior to the end of January 2011 via subscription of an additional US$5 million.
All funds subscribed will be used to progress Composite’s CBM business in Europe. This will include accessing a number of high value new licence opportunities, furthering Composite’s ongoing work program on its existing 17 CBM licences in the United Kingdom and Europe, and furthering the evaluation of shale gas potential in several of Composite’s licence areas.
Dart has the ability to capitalise on value created in Composite via an option to move to 100 percent ownership, exercisable prior to the end of June 2011, by acquiring the remaining 80 percent of the company for US$56 million. This is payable in cash, or in Dart shares issued at the then prevailing market price, or in a combination of cash and shares, as Dart may elect. Dart also has the ability to farm-in to 50 percent non-operating stakes in Composite’s interests in any newly identified projects in Europe, in the event that Dart does not move to 100 percent ownership of Composite.
In announcing the transaction, Dart Chief Executive Officer and Managing Director, Mr Simon Potter said the investment in Composite was a significant development. “Composite is an established European CBM business with an existing portfolio of assets, an in-place management team, a strong pipeline of opportunities and a significant NSAI certified resource position,” Mr Potter said. “The investment therefore provides Dart with a compelling entry platform into the European CBM and shale gas industry, albeit in a staged way that does not detract focus from our existing current activities. “We will initially be a significant shareholder in Composite, and can thus provide the company with technical assistance and know-how, but at the same time work closely with and benefit from Composite’s experience in European CBM and shale and their ongoing partnership with BG Group. “Our objective is to see Composite’s existing assets progress rapidly to development, and to help the company secure high-value new projects currently in their pipeline. Thereafter, we will have the option to increase our position and ultimately to move to full ownership of Composite, which would establish Dart as an operator of scale in Europe,” he said.
Dart considers the key highlights of this transaction to be:
• Significant enhancement of the net Dart resource base. Assuming eventual acquisition of 100 percent of Composite and based on only the current Composite portfolio, the addition of 18 TCF of gross CBM OGIP (per NSAI) and 12.8 TCF of gross shale gas OGIP (1.2 TCF per NSAI, balance Composite estimates). In addition, Composite has a significant pipeline of nearterm opportunities across a spectrum of European CBM and shale opportunities.
• A low-cost acquisition. Assuming eventual acquisition of 100 percent of Composite and based on only the current Composite portfolio, aggregate consideration paid by Dart would be US$68 million. Based on combined Composite CBM and shale net OGIP of 16.6 TCF this implies an acquisition cost of 0.4 cents per MCF net (in US$ terms).
• Ability to leverage Dart knowledge base and technical skill set. A key part of the strategic rationale and value equation of the transaction for both Composite and Dart is the secondment of specialist Dart personnel to supplement and enhance the existing Composite capability.
• A risk mitigated entry strategy to the European CBM and shale gas industry. This is achieved through the staged nature of the investment and the optionality thereby afforded to Dart.
• Access to an attractive new market. The European gas market is characterised by a substantial supply-demand imbalance, with European domestic production projected to only meet 38 percent of demand in 2020, down from 51 percent today. Consequently, Europe is becoming increasingly reliant on gas imports, which CBM gas could readily substitute. Europe has a developed and extensive pipeline infrastructure, and gas pricing is currently in the US$6 to US$8 per MCF range. Dart therefore considers Europe to be a new geography that is complementary to the existing asset base, and consistent with the company’s stated strategy and priority areas for expansion.
• An established business platform. In addition to its existing portfolio of assets, Composite has an established operating base and business platform. Dart will have access to Composite’s management, knowledge, database and expertise derived since 2004 and representing a cumulative spend on Composite’s assets of over US$40 million to-date. The staged transaction structure and in-place management team means that a substantial diversion of Dart management time to Composite is not required, but at the same time Dart will have the opportunity to strategically supplement Composite’s skills-base with the accumulated knowledge, intellectual property and experience of Dart.
• A window into shale gas. Composite has established an early-stage shale gas position and this will afford Dart a measured means of evaluating this complementary area of activity.
Composite is a privately held company with interests in 15 CBM blocks in the United Kingdom, two CBM blocks in Poland, and a pipeline of near-term CBM and shale opportunities across continental Europe. Composite is currently privately owned by its management (approximately 28 percent), BG Group (BG, 10 percent), Royal Bank of Scotland (19 percent), and a private investor for the balance. BG, in addition to owning 10 percent of Composite, is party to an agreement with Composite whereby BG can farm-in to a 50 percent non-operating stake in individual Composite projects, by agreeing to pay early stage appraisal and exploration costs on those projects, once secured by Composite.
BG has farmed-in to most of Composite’s current projects on this basis. Composite also owns 100 percent of Geometric Drilling Limited (GDL), a company that owns and operates three CBM drilling rigs in Europe. Composite operates GDL as a fully independent business and as part of the agreement with Dart, GDL will be separated from Composite prior to the end of January 2011. Thereafter, Composite will retain priority access rights on favourable terms to GDL rigs. Composite currently has approximately 25 staff employed in the CBM business.
Composite’s head-office is located in Stirling, Scotland. Composite’s Acreage and Resource Base Composite’s asset base is summarised as follows: Netherland Sewell & Associates Inc (NSAI) has, as at 31 December 2008, certified a CBM resource position in respect of Composite’s assets, as follows: Netherland Sewell & Associates Inc (NSAI) has, as at 31 December 2008, certified a CBM resource position in respect of Composite’s assets, as follows: See www.composite-energy.com for additional information. The Dart Investment Dart has initially acquired a 10 percent stake in Composite for US$7 million, by way of subscription for new equity. Dart will have an option to subscribe a further US$5 million new equity in Composite for a further 10 percent stake in Composite, exercisable at any time prior to 31 January 2011. All subscription funds will be used by Composite for the purposes of securing of new licences in continental Europe and furthering an agreed 2010 / 2011 work program for PEDL 133. Thereafter, Dart will have a further option to acquire the remaining 80 percent of Composite from the Composite shareholders, moving to 100 percent ownership of the company.
The amount payable to the Composite shareholders on exercise of this option is US$56 million, payable in cash, or in Dart shares (by reference to the Volume Weighted Average Price of Dart shares in the 30-day period preceding exercise of the option), or in combination of cash and shares (as Dart elects). The option is exercisable at any time prior to 30 June 2011. Dart and Composite have agreed a work program and budget for Composite for the remainder of 2010 and the 2011 calendar year, which will involve:
• Actively seeking to secure title to identified high prospect new CBM and shale licences in continental Europe
• Ongoing CBM exploration and appraisal on PEDL 133, with a view to PEDL 133 being progressed to early stage production during 2011, with first gas sales thereafter
• Shale evaluation and appraisal on PEDL 133 and certain other Composite licence areas Dart will have certain veto rights in relation to the execution of the work program and budget. Dart will also initially have observer status on the Composite Board and audit and remuneration committees, moving to full Board representation if and when Dart becomes a 20 percent shareholder.
Dart will provide ongoing assistance to Composite, including secondment of technical personnel. If Dart elects not to exercise the options to increase its stake in Composite, Dart will instead be able to directly farm-in to 50 percent non-operating interests in agreed Composite projects by funding 100 percent of the agreed initial work-programs.